Google's (GOOG) Nexus 7 is finally available in stores. Early news about its demand turned out to be quite positive: it has been sold out at many stores. PC World even went so far as to describe it as the "red-hot" tablet. On Google play, the estimated shipping is between 1-2 weeks (screenshot below); another sign that demand is outpacing supply.
Based on its features, Nexus 7 crushes Amazon's (AMZN) Kindle Fire, which is not yet one-year old. Different from Kindle Fire's stripped down version of Android, which is entirely controlled by Amazon, Nexus 7 has the flexibility of a fully functioning Android. It is a true tablet at a very affordable price. Because of this, Nexus 7 is starting a new era, the era when full-featured tablets become affordable to the mass public. I agree with this view that Nexus 7's killer feature is its $199 price tag.
Nexus 7 represents a battle between two business models. The first is Apple's (AAPL) model: everything serves the hardware. Apple has built up a full "ecosystem", but its main purpose is to ensure the hardware, be it iPhone or iPad, works nicely and has a lot of apps. Apple in turn, draws most of its profits from selling the devices. This is still the case today. Google has an entirely different business model. It provides many free services such search, Gmail, and Google drive, but makes money through advertising on these platforms. The same applies to its cheap tablet Nexus 7. At a cost of approximately $152 based on some estimates, Nexus 7 is perhaps not making much money directly off the hardware. Google's goal is to get it back from search on these devices and selling music, movies, and apps.
The first model has been working pretty well for Apple. But the second model has at least two key advantages. First, it is very cheap to start with for consumers, making the purchase decision easier. Second, the "cost" of using such a device is often hidden or non-existent. For instance, a few search ads can barely have much negative impact on user experience.
Looking into the future, what should investors of Google, Apple, Microsoft, Nokia, and Amazon expect?
Interestingly, Google may not see much instant impact from Nexus 7. Google is a large company, already dominating in the search market. The revenue stream from Nexus 7 isn't going to be big in the short term. However, if the initial sales of Nexus 7 is any indicator of its future success, Android based tablets will start to seriously eating into Apple's dominating market share. In the long run, this is good news for Google. The impact of Nexus 7 on Google's stock price is therefore as follows: short term neutral, long term positive.
My conclusion is Amazon is not necessarily the biggest loser in this. A bit surprising? Consider this: Amazon wasn't making money on Kindle Fire. So even in the worst case scenario, Amazon kills the Kindle Fire product line, Amazon still makes money selling books through its Kindle app for both Android and iOS. It is however very possible that Amazon will introduce an enhanced version of Kindle Fire this year. But the sales of a new 7" Kindle Fire, unless significantly cheaper than $199, will almost surely take a big hit from Nexus 7. The impact of Nexus 7 on Amazon's stock price: short term neutral or negative, long term neutral.
Fortunately for Microsoft (MSFT), its Surface tablet target directly at iPad. It may not directly compete with Nexus 7. But whatever impact Nexus is going have on Apple, the same applies to Microsoft. Being still a minor player in mobile OS, Microsoft has a big stake in Windows 8. The good news for consumer is, we should perhaps expect Surface has a very competitive pricing this autumn. The impact of Nexus 7 on Microsoft's stock price: short term negative, long term negative.
Nexus 7 brings more bad news for Nokia (NOK), which has been rumored to be preparing a Window 8 based tablet. Since Nokia is Microsoft's mobile partner, it may not be working on a 9 to 10-inch tablet, which would directly compete with Surface. That leaves the 7 to 8-inch the only option for Nokia. With a strong product like Nexus 7 as the benchmark, the competition will be very tough to beat. This is adds to the series of bad news for Nokia lately.
Finally, how does Nexus 7 influence Apple, the king in the tablet market? As I have argued in an earlier article, when it comes to pricing, Apple is much more vulnerable than many people thought. What Nexus 7 does is to bring the tablet market down to a pricing level that is affordable by the mass public. Bad news for Apple. It faces a dilemma: if Apple doesn't do anything, its potential market will be eroded by Nexus 7. If however Apple introduces an iPad mini, like many rumored, the product will have to be priced below $300 to be attractive. Mostly likely, it will have to either match Nexus 7 at $199 or slightly higher at $249. Such a product will cannibalize the demand for the new iPad at a massive scale. Apple may see a higher demand in its tablets with iPad mini, but the profit margin will get much thinner. In my opinion, it is not worthwhile for Apple to risk its high end tablets, and the rumored iPad mini may not exist.
On the other hand, the holiday season is still far away. Google has enough time to introduce another tablet, the rumored Nexus 10. Given Google's aggressive pricing history and the cost structure of the new iPad at $310 (similar cost likely applies to Google), a Wi-Fi only Nexus 10 without Retina display could be priced at $350 or even $300. That, if turned out to be true, would really hammer down iPad in market share growth.
To summarize, in terms of stock performance, Nexus 7 will have less impact on Google itself and surprisingly Amazon. It will have more negative influence on Apple, Microsoft, and Nokia.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.